OREANDA-NEWS. Fitch Ratings has affirmed the Russian City of Samara's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB+' with Stable Outlooks, Short-term foreign currency IDR at 'B' and its National Long-term rating at 'AA(rus)' with a Stable Outlook.

The affirmation reflects Fitch's unchanged base line scenario that the city will continue to record stable operating balance in line with 2015 actuals and moderate direct risk, which growth will be limited by narrowing fiscal deficit.

KEY RATING DRIVERS
The 'BB+' rating reflects the city's stable budgetary performance underpinned by a diversified local economy and potential financial support from Samara Region. It also factors in the city's moderate direct risk, albeit with a high bias toward short-term bank loans. This exposes the city to high refinancing risk and makes Samara dependent on access to financial markets in order to refinance maturing debt.

Fitch expects the operating balance to hover close to a sound 11%-12% of operating revenue in 2016-2018, which is in line with the 2015 outrun of 12%. This is slightly below the strong average of 16% in 2013-2014, but still commensurate with Samara's rating. The weaker 2015 operating balance derived from city's tax revenue contraction by 10% as a result of the weak economic environment. Growth in current transfers and cost-efficiency measures implemented by the administration help mitigate tax revenue drop but cannot fully compensate it.

Weaker operating balance and increased interest expenditure caused narrowing of current balance, which led to reduction in city's self-financing capacity for capex and induced widening of deficit before debt variation to 5.6% of total revenue in 2015 (2014: -1.6%). The city intends to conduct a prudent budgetary policy and budgeted zero deficit for 2016-2018. However, Fitch expects that weak economic environment will curb tax revenue recovery and city's deficit before debt variation stays at 2.5% of total revenue in 2016 and gradually narrow to 2% in 2017-2018.

According to Fitch's projections, the city's direct risk will remain moderate at RUB7.7bn (35.8% of current revenue) by end-2016, slightly up from RUB7.1bn (35.1%) a year earlier. The prudent budgetary policy of the city's administration aiming to limit fiscal deficit should lead to direct risk stabilisation below 40% of current revenue in 2017-2018. Contingent risk is low as the city does not have outstanding guarantees and its public sector entities are self-sufficient.

Despite the moderate debt burden, Samara is exposed to refinancing risk as it mostly relies on short-term bank loans for deficit financing. By end-2016 the city needs to refinance RUB6bn of maturing bank loans. To meet this obligation, in December 2015 the city contracted several revolving credit lines with banks with two years maturity. Most of these credit facilities were not used and are available at first demand. At 1 January 2016, these credit lines amounted to RUB3.5bn and cover about 60% of bank loans due till year-end. Fitch expects the city to be able to roll over the remaining maturing bank loans, although the short-term tenor of its loans means that it will continue to face refinancing risk.

With a population of above one million, the city is the capital of Samara region, which has a well-developed diversified economy, based on a processing industries and services. However, Fitch estimates there was a 3.5% contraction of national GDP in 2015, and expects a further 1% decline in 2016. We believe the city will also face a slowdown of its economic activity, which would have negative repercussions for the city's tax revenue.

RATING SENSITIVITIES
A strong budgetary performance with sustainable operating margin above 15% and maintenance of moderate debt with lengthening of debt maturity profile in line with debt payback (direct risk to current revenue, 2015: 4 years) could lead to an upgrade.

Continuous deterioration of the budgetary performance leading to a direct risk growth above 50% of current revenue (2015: 35.2%) driven by short-term financing would lead to a downgrade.